Mortgage rates are now responding to last week's plunge in bond yields due to fears about systemic financial risk in the U.S. and Europe.
Several mortgage lenders and brokerages started cutting fixed mortgage rates on Monday, some by as much as 60 basis points. In just two weeks, Government of Canada bond yields (which typically lead to fixed mortgage rates) dropped by approximately 70 basis points.
Based on data from MortgageLogic.news, national deep-discount 5-year fixed mortgage rates are now about 30 basis points lower than last week.
Two regional U.S. banks, Silicon Valley Bank (SVB) and Signature Ban, collapsed earlier this month, triggering extreme volatility in financial markets.
To prevent the banking crisis from spreading, the world’s largest central banks came together over the weekend to calm rattled markets. A number of central banks, including the U.S. Federal Reserve, the Bank of England, the European Central Bank, and others, have announced measures to ensure adequate market liquidity.
To reduce potential strains on global markets, the central banks said they would increase the frequency of their U.S. dollar auctions from weekly to daily.
There has been an increase in demand for safe-haven assets, such as government bonds, due to growing concerns about the global financial system's ability to withstand shocks, and the tendency of financial markets to assume the worst until convinced otherwise in such circumstances. As Integrated Mortgage Planners broker Dave Larock wrote in his latest blog post, investors are more concerned with the return on their capital than with the return on their capital.
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As a result of the steep decline in bond yields, fixed mortgage rates have been slow to follow.
"Lenders and the institutional investors who fund their mortgages won't be rushing to put more capital at risk until they are confident that the recent bank failures are not a precursor to a broader market crisis," he said.
Furthermore, when a lender's base borrowing rates fall as a result of financial stability concerns, the risk premiums that lenders must pay always increase."
Mortgage rates are declining
According to Edge Realty Analytics' latest Housing and Mortgage Market Trends report for Mortgage Professionals Canada, the current stress in the financial system will likely tighten credit availability.
"That's potentially bad news, but at least in the short term it means lower mortgage rates," he said.
Prospective buyers and homeowners facing mortgage renewals want to know how long the market volatility will last and whether fixed mortgage rates might drop.
In the midst of such uncertainty, seasoned rate watchers like Ron Butler of Butler Mortgage are hesitant to make forecasts.
"I don't know what will happen, I can only go day by day," Butler told CMT. "This is the most volatile market since 2008."
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What does the current situation mean for mortgage holders? Butler said the current conditions may allow some variable-rate borrowers to lock in a fixed rate.
In addition, he warned against five-year fixed rates, which many lenders insist upon when converting to fixed rates. If you want to break your mortgage early, you should be cautious, learn what your variable penalty is, and then look at other lenders' fixed-rate offers, calculate the penalty cost, and see if there's a mathematical advantage.”
Although recent market instability has moved forecasts for potential Bank of Canada rate cuts to this year, Butler continues to advise borrowers to avoid new variable-rate mortgages.
"There's still a premium cost compared to short-term fixed-rate mortgages, and it makes no sense to pay more to take on the risk of a rate increase, even if it's small, when a 2-year fixed product is much cheaper." Do not consider a variable until the extreme economic volatility is long gone. Forecasts have been wrong for too long.
Larock said it remains unclear where mortgage rates will go from here, as it will depend on what happens in the near term with this banking crisis.
There is a possibility that mortgage rates will drop more if the financial markets stabilize, and bond yields remain at their current levels, but that depends on how things unfold over the near term.
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